§ 2.4 Medicaid & Elder Law

Six Costly Medicaid Planning Mistakes

The errors below recur constantly, they are almost always made by people trying to do the right thing, and every one of them is avoidable with information that costs nothing.

One: giving the house to the children

This is the most damaging single mistake in the field, and it is committed out of the best of motives by families who have heard that the state "takes the house".

Four things go wrong at once. The transfer is a gift for less than fair market value, so it creates a penalty period computed on the home's full value — often a year or more of ineligibility, beginning when the parent is already in care and out of money. The home was very probably exempt anyway while the parent lived there or intended to return, so the transfer gave away protection the family already had. The children take the parent's original cost basis rather than the stepped-up basis they would have received at death, which can convert a tax-free inheritance into a very large capital gain. And the house becomes exposed to the children's creditors, divorces and bankruptcies, and can no longer be sold to pay for the parent's care.

Where the objective is to keep the home out of estate recovery, Texas offers instruments that do not have these consequences — the transfer on death deed and the lady bird deed discussed on the living trusts page, and the narrow caretaker child and sibling exceptions. Those require advice specific to the facts. An outright gift almost never does.

Two: assuming the annual gift tax exclusion is a Medicaid exclusion

The federal gift tax annual exclusion allows a person to give a set amount per recipient per year without filing a gift tax return. It has no application to Medicaid whatsoever. There is no small-gift exception to the transfer penalty.

The consequence is that ordinary family generosity — helping a grandchild with tuition, paying a child's medical bill, the customary cheque at Christmas — is fully counted if it falls within the look-back window. Applications routinely fail on the sum of transfers nobody considered a "gift" at the time. This is not a reason for older Texans never to be generous. It is a reason to know that generosity within five years of needing care has a price, and to keep records.

Three: adding a child's name to an account or a deed

Adding an adult child as a joint owner is done for convenience — so someone can pay the bills — and it creates problems in every direction. Depending on the account, adding a name can be a transfer for penalty purposes. The whole balance may be presumed to belong to the applicant on application, requiring proof of contribution. The funds are exposed to the child's creditors and divorce. On death the account passes to the surviving joint owner regardless of what the will says, frequently disinheriting the other children by accident. And on real property it creates a co-owner who must consent to any sale.

The correct instrument for the convenience problem is a durable power of attorney, which allows an agent to act without transferring ownership. See the core documents page.

Four: believing a revocable living trust protects assets

It does not. Assets in a revocable trust are fully countable, exactly as if held outright, because the grantor can take them back at any time. A great many Texas families have paid for a trust in the belief that it would help with long-term care and have discovered otherwise at the worst possible moment. Only irrevocable arrangements, established well outside the look-back, affect countability — and they carry the consequences described on the irrevocable trusts page.

Five: waiting to apply until everything looks tidy

Applications get postponed because a document is missing, or a bank statement has not arrived, or the family hopes the situation will resolve. Meanwhile private payment continues at several thousand dollars a month, and limited retroactive coverage — which in the ordinary case reaches back only a short period before the application month — is lost month by month.

Applications can be supplemented and denials can be appealed. Time cannot be recovered. Where eligibility is genuinely in doubt, applying and appealing is usually better than waiting and hoping.

Six: not protecting the spouse at home

The spousal impoverishment rules exist to prevent exactly the outcome families fear most, and they are routinely underused because nobody explains them. A community spouse is entitled to a protected share of the couple's countable resources, and where their own income is low, to a diversion of part of the institutionalised spouse's income.

Two errors are common. The first is failing to request a resource assessment promptly, since the protected share is calculated as at the date of institutionalisation and delay while resources are consumed reduces it. The second is spending the couple's resources on care before establishing the allowance, which converts protected money into paid bills. Both are addressed on the crisis planning page.

The pattern underneath all six

Each of these mistakes comes from acting on a plausible general belief instead of on the actual rule. The house is not automatically taken. The gift tax exclusion is not a Medicaid rule. A trust is not automatically protective. Joint ownership is not a substitute for authority. Waiting does not help. And the spouse at home has rights nobody at the facility is obliged to explain.

Before any transfer, any deed, any account change or any trust signature, it is worth confirming the actual rule against the Texas Health and Human Services material and, where the amounts are meaningful, with a lawyer who practises in this area. The cost of asking is trivial against the cost of any one of the six.